As many of you might be aware the central government has launched a new Exchange Traded Fund (ETF) known as the Central Public Sector Enterprises (CPSE) fund in order to augment its disinvestment activities in the current fiscal. The Government expects to meet its lowered disinvestment target of Rs 16,027 crores by raising about Rs 3,000 crores from the CPSE ETF during this fiscal year.

The stocks constituting the index and their respective weightages are listed in the table below:
 

Company's Name	Weight (%)	Industry
Oil & Natural Gas Corporation Ltd.	27.60	Energy
GAIL (India) Ltd.	17.84	Energy
Coal India Ltd.	17.32	Metals
Rural Electrification Corporation Ltd.	7.13	Financial Services
Indian Oil Corporation Ltd.	6.96	Energy
Oil India Ltd.	6.95	Energy
Container Corporation of India Ltd.	6.55	Services
Power Finance Corporation Ltd.	6.35	Financial Services
Bharat Electronics Ltd.	2.05	Industrial Manufacturing
Engineers India Ltd.	1.26	Construction

(Source: NSE India)  

As can be observed from the table, this CPSE Index comprises of 10 blue chip PSU stocks, out of which ONGC, Gail and Coal India constitute over 60% of the total weightage. In value terms, maximum stake would be sold in the aforementioned companies and the least in Engineers India.

The subscription to this new fund offer (NFO) is open for investing for retail investors from March 19, 2014 until March 21, 2014. A 5% discount is being offered to investors applying through this NFO. Moreover, bonus units will be allocated to those who hold on to their investments for more than a year. The Government believes that launching an ETF for disinvestment purposes will restrict short selling activities that usually surge up during this period due to the price discrepancies occurring before and after the public issue. This is because unlike other disinvestments where stake in a single company is usually diluted, the CPSE ETF would aim at selling the government holdings in 10 large public sector companies. Also the fact that investors would be allotted “units” and not “shares” once they make a purchase in the CPSE ETF NFO, reduces the chances of an arbitrage opportunity taking place. The purchase price of units would be determined on volume-weighted average price (VWAP) basis.
 

How has the PSU index performed?

Scheme Name	YTD ( %)	1 Year (%)	5 Years (%)
S&P BSE 200	2.1	7.7	21.8
S&P BSE PSU	0.1	-15.3	4.8
CPSE INDEX	3.9	-6.2	13.3

(Returns over 1 year are compounded annualized)
(NAV as on March 11, 2014)
(Source: NSE India, Ace MF)
The table above reveals that the CPSE Index (the benchmark index tracked by the CPSE ETF) and the S&P BSE PSU (comprising of PSU companies) has underperformed the S&P BSE 200 Index across the last 1 and 5 year time frames by huge margins. On a year to date basis, while the CPSE Index has fared better than the S&P BSE 200, the S&P BSE PSU Index has underperformed the broader index.

Our view: Currently, PSU stocks are available at attractive valuations to investors. Some other incentives such as discounts on purchase price, loyalty bonus etc. further makes this ETF an attention grabbing opportunity for investors. Moreover, the constituents forming this ETF hold a good track record for dividend payouts.

However, PersonalFN is of the view that sector or thematic funds generally outdo broader markets only when the underlying sector or a theme is doing well; but might incur heavy losses when the sector hits a rough patch. Most of the stocks constituting the PSU ETF belong to sectors such as Energy, Financial Services and Metals. These sectors have been hit hard by the prevailing lull in the economy. Moreover, the composition of PSU ETF is highly skewed towards just three stocks (viz. ONGC, Gail and Coal India) and thus faces concentration risks. These stocks belong to sectors which could be heavily affected by the changes in the government policies.

Hence PersonalFN believes that, those investors who are risk averse and have not yet created a diversified investment portfolio to meet their financial goals would be better-off avoiding the CPSE Exchange Traded Fund due to the risks involved. Only investors with a high risk appetite and who have already established a diversified portfolio to take care of their financial requirements may indulge in this offering with a petite amount, thus it not being a part of one’s core portfolio. The core portion of your investment portfolio must contain diversified funds depending upon your time horizon and risk tolerance level.

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